Price Elasticty Of Demand

Question 1

What does PED measure?

Answer 1

How sensitive consumer demand is to a change in prices (displays how big a factor price is when people are purchasing goods)

Question 2

What is elastic demand?

Answer 2

• when people are very sensitive to changes in price
• is the PED is higher than 1

Question 3

What is inelastic demand?

Answer 3

• when people are not very sensitive to changes in price
• PED is between 0 and 1

Question 4

How is PED calculated?

Answer 4

% change in quantity demanded / % change in price

Question 5

What is unit elasticity?

Answer 5

• when PED is 1
• the price of the product and quantity demanded is perfectly proportional

Question 6

What are the factors that affect PED?

Answer 6

SPLAT
- Substitutes
- Percentage of income
- Luxury/necessity
- Addictive/habit forming
- Time period

Question 7

What are firms most likely to do if PED is inelastic?

Answer 7

Increase prices because they know their sales are not likely to fall by much

Question 8

What are firms most likely top do if PED is elastic?

Answer 8

Reduce prices because a small decrease in price will lead to a massive change in demand

Question 9

What are firms most likely to do if PED is unitary elastic?

Answer 9

Nothing

Question 10

What does unit elasticity do to the demand curve?

Answer 10

Perfectly diagonal as the firm has maximised revenue

Question 11

What do price elastic goods do to the demand curve?

Answer 11

horizontal with a slight slope downward (as a small change in price will lead to a large change in quantity demanded)

Question 12

What do price inelastic goods do to the demand curve?

Answer 12

• vertical with a slight left leaning tilt (as a big change in price will only cause a small change in quantity demanded)